LONDON, Dec 27 (Reuters) - Italy’s 10-year government bond yields inched higher, moving further off recent lows, on Thursday as renewed worries about the future of Italy’s 10th largest lender offered a reminder of the country’s banking sector woes.

The top investor in Banca Carige has blocked approval of a crucial cash call at the troubled Italian bank because it wanted more clarity on the lender’s future.

The rejection puts Carige’s future into question and raises more questions over the sector, which is wrestling with rising funding costs and a hit to capital buffers.

It also takes the edge off a strong rally in Italian government bonds, after the country’s populist government agreed a budget with Brussels after weeks of wrangling.

The yield on 10-year Italian government bonds rose four basis points in early European trade to 2.88 percent, well off last week’s low of 2.72 percent.

The closely-watched Italy/Germany 10-year bond yield spread widened by 6 bps from Friday’s close to 265 bps, a good distance from the 250 bps touched last week.

Italy’s banking sector, which has been choked with high levels of non-performing loans in recent years, is often seen by economists as a drag on the country’s growth prospects.

Other euro zone bond yields were slightly lower on the day. Germany 10-year bond yields, the benchmark for the bloc, were 1.5 bps lower at 0.234 percent, flirting with a seven-month low of 0.203 percent hit last week.

Demand for safe-haven government bonds has been swelling steadily since the start of November on increased stock market volatility, particularly in the United States. But a broad Wall Street rebound on Wednesday allowed 10-year U.S. yields to move five bps higher to 2.80 percent